In December 2017, President Donald Trump signed the Tax Cuts and Jobs Act into law, the first major tax reform since 1986.
Most provisions became effective Jan. 1, 2018, and some even expire after 2025. Although the bill’s primary function is a massive corporate tax cut, individual taxpayers are also impacted by an across-the-board tax cut.
These laws will affect the 2018 tax year; they will not affect your 2017 tax return.
One of the major changes in the new tax bill is the lowering of rates for almost all tax brackets. As you can see below, each bracket except the first now has a lower rate. How the adjusted tax brackets affect you is determined by multiple factors, like how much you earn, whether you’re married or single and so on.
In addition to lowering the rates, the income thresholds were raised. Because the U.S. tax system is progressive not every dollar earned is taxed at the same rate. Due to the shift, more income will now be taxed at the lower rate.
|Previous law||After reform|
|10%||$0 - 9,525||10%||$0 - 9,525|
|15%||$9,525 - 38,700||12%||$9,525 - 38,700|
|25%||$38,700 - 93,700||22%||$38,700 - 82,500|
|28%||$93,700 - 195,450||24%||$82,500 - 157,500|
|33%||$195,450 - 424,950||32%||$157,500 - 200,000|
|35%||$424,950 - 426,700||35%||$200,000 - 500,000|
But before the lower brackets and higher thresholds come into play, you need to know your taxable income amount. Taxable income is calculated by adding all of your yearly earned income together, applying adjustments – like IRA contributions, for example – which will result in your Adjusted Gross Income (AGI). Then you will subtract deductions and personal exemptions from your AGI to arrive at your taxable income amount.
Personal exemptions – the amount a taxpayer is entitled to claim as a deduction against personal income – have been eliminated, and will not be applicable when you file your taxes in April, 2019. At that time, taxable income will be calculated only by subtracting either the standard deduction or itemized deductions from the AGI.
Taxpayers will choose between using the standard deduction or itemizing deductions, depending on which amount is larger.
Higher standard deduction
As a result of the reform, the standard deduction has nearly doubled to $12,000 for individuals, or $24,000 for married couples who file jointly. This – along with other new factors – may impact a taxpayer’s decision to itemize deductions.
Changes to itemized deductions
Traditionally, around 49 million taxpayers (28%) itemize deductions because the total amount may exceed the standard deduction. However, the new tax law, which either eliminated or restricted many itemized deductions, may change this.
Temporary changes (through 2025)
- State and local taxes (SALT) - Currently, taxpayers can deduct what they pay in state and local property, income, and sales taxes from their federal return. The new law caps these total deductions at $10,000.
- Home mortgages - Mortgage interest remains deductible with two important changes. First, deductions are now limited to interest on the first $750,000 (down from $1 million) of your mortgage debt, or $375,000 for married persons who file separately. Interest on a second home is also deductible but within the same limit. The second major change is that interest on home equity loans is no longer deductible.
- The child tax credit - a credit for each qualifying child under 17 – has been increased from $1,000 to $2000 per qualifying child. The refundable portion of the credit is limited to $1,400, and the earned income threshold was lowered from $3,000 to $2,500.
- Charitable giving - The charitable giving deduction remains for taxpayers who itemize. Under the new law, the deduction is limited to 60% of adjusted gross income (AGI) for cash gifts. This was an increase from 50%.
- Alimony - Deductions for alimony payments will be eliminated starting in 2019, at which time divorce will cost alimony payers more than in 2018 and before. At the same time the recipients or payees will benefit more by a divorce in 2019 because they won’t be required to include the payment as income.
- Pass-through businesses - Another permanent change affects pass-through business entities – like partnerships, sole proprietors, etc. – which will get a 20% deduction if certain rules are met. Please consult a CPA or tax lawyer for more information.
Another important change involves 529 plans, which are tax-advantaged investment accounts used for college expenses. A 529 plan’s account earnings grow federally tax free and can be withdrawn, penalty-free, if used for “qualified education expenses.” Qualified education expenses used to only be defined as higher education (i.e., college) expenses, like tuition, room and board, books and similar items. The definition has now been expanded to include costs associated with public, private and religious K-12 education. Fund withdrawals used for K-12 expenses are limited to $10,000 per student each year. In other words, if a family has two kids and multiple 529 accounts, they can only use $10,000 per child in aggregate of all accounts for that year. Account owners should understand their state’s rules regarding how K-12 funds will be treated for tax purposes. Click here for more information.
The tax reform also affects how your estate – money and property – is taxed after you die. The law doubled the exemption base for estate transfer taxes from $5.6 million to $11.2 million for individuals. Meaning that the tax is not triggered unless the estate amount exceeds $11.2 million. Because that number is so high, the estate tax does not come into play for the majority of Americans. In addition, the yearly gift tax limit has increase from $14,000 to $15,000.
For more in depth discussion and explanation of these new tax laws, please contact your CPA or attorney.
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